Washington
should tread lightly with its environmental legislation, so that
carbon cuts will not come at the expense of Canada's energy
sovereignty or US energy security

The
United States targets Canada's oil sandsby
Shantel Beach --- Council on Hemispheric Affairs

Even
though climate change legislation has stalled within the United
States, President Obama's willingness to bypass Congress using the
authority of the federal Environmental Protection Agency (EPA)
signals that he is seriously prepared to cut US carbon emissions. The
way in which Obama forges ahead in this battle to fight climate
change will shape not only his country's future, but also the future
relationship the United States shares with its largest trading
partner, Canada.

Immediately
after Obama announced that he would be attending the Copenhagen
Climate Change Summit, Canada's Prime Minister Stephen Harper
mimicked the move, and with good reason. If the climate change
measures currently under discussion in Congress prove to be a good
indicator of what's to come, then Prime Minister Harper is on solid
ground to gear-up for a political skirmish with the United States
that will wholly transform energy relations between the two
countries. If Obama enacts environmental legislation targeting
Alberta's carbon-intensive oil sands, he should be prepared to lose
the many corresponding political and economic benefits his country
has long enjoyed as a result of historic energy trade with Canada.

All
too soon, Washington may find that if it pushes too hard or too fast
with carbon cutting legislation targeting the oil sands, its friendly
neighbor might finally grow tired of being taken for granted when it
comes to oil. Canada can, and likely will push back, especially
because China is more than happy to step-in and purchase oil north of
the 49th parallel if the United States chooses not to.

Why
Canada matters

Canada,
not Saudi Arabia, Mexico or Venezuela, is the single largest foreign
supplier of oil to the United States. A sizeable 17 percent of total
US oil imports come from Canada, and according to the most recently
disclosed official statistics from the US Energy Information
Administration (EIA), imports of Canadian crude oil totaled a
formidable 1.9 million barrels per day (bbl/d) in September of this
year alone. This figure was nearly double the imports from the next
largest supplier, Mexico. In fact, Alberta, Canada's oil-producing
province, currently exports more oil to the USA than any other
country in the world. Reflecting general yearly trends, in the month
of September, Canada provided more petroleum to the United States
than Saudi Arabia, Iraq, Kuwait, and Russia combined. With its proven
oil reserves totaling 174.2 billion barrels, Alberta boasts the
second largest reserves in the world, next only to Saudi Arabia. Last
year, Alberta's crude oil exports to the United States totaled an average of 1.5
million bbl/d and despite a temporary slowdown in international
demand for oil in months prior, in September 2.4 million barrels of
petroleum products per day continued to enter the United States from
Canada, doubling the level of imports from Saudi Arabia.

Gas
guzzling in the United States

Contrary
to the notion that the thirst for non-renewable energy is decreasing
in the United States, oil consumption is actually on the rise.
Reliance upon Canadian petroleum products remains a daily reality.
According to recent data, the United States produces a meager 10
percent of the world's petroleum, but consumes a sizable 24 percent.
As long as demand is greater than domestic supply, oil imports will
remain critical to the survival of the US economy, and the
maintenance of its energy security. According to the EIA, September
gasoline consumption in the United States climbed by 4.7 percent (400
thousand bbl/d), compared to last year, a number which reflects
rising overall consumption. This was the fourth month in a row that
gasoline demand increased from the previous year, a trend that will
likely reappear in the upcoming months.

"Oil
sands" shouldn't be a dirty word

While
much of Canada's aforementioned oil reserves come from conventional
wells, the oil sands make up a significant percentage of the cache.
Like Venezuela, the oil sands have contributed greatly to Canada's
known reserves, and have played a large part in ranking it above
other countries as an energy supplier. Most of the public is at least
familiar with the term "oil sands" (also called tar sands).
In recent months many environmentalist groups like Green Peace have
done everything in their power to reduce the popularity of this
namesake to an all-time low. By executing brash public
smear-campaigns, the anti-oil sands movement in the United States
reached its peak this September when Prime Minister Harper came to
Washington to speak with President Obama. Harper was met by angry
activists and lobbyists alike, who had one message: "stop the
tar sands." Despite their robust allegations that the oil sands
contribute greatly to global warming, it is commonly acknowledged
that the oil sands make up a meager 5 percent of Canada's overall
carbon emissions, and on a global scale, they account for less than
one-tenth of one percent of all greenhouse gas emissions. To put this
number into perspective, oil sands emissions only equal about
one-half of what New York City emits each year.

Oil
from the oil sands cannot be extracted using traditional drilling
techniques, and instead much of it requires in-situ (or in-place)
extraction, which occurs underground. While it is true that currently
it takes more energy to extract a unit of oil from the oil sands than
it does from other conventional deposits, as extraction technology
improves, this will not always be the case. Generally speaking, per
barrel of oil, carbon dioxide emissions have been reduced by 45
percent since 1990, and progress continues today. If investment in
the oil sands continues to rise, so too will the efficiency of the
associated technology. With time and without restriction, the oil
sands will likely become less carbon intensive by their very nature.
Enhanced oil recovery technology (EOR) unlocks oil from the oil
sands, and has made tremendous progress and has had astonishing
results since its inception. According to Leonardo Maugeri of the
Wall Street Journal, "when new exploration technologies do take
root, the results are remarkable." Given that to date
legislation to cut emissions has not made EOR technology
uneconomical, Maugeri emphasizes that, "In the past few years,
the industry has succeeded in striking oil at depths below 10,000
feet of water and 20,000 feet below the seabed --- as in the Gulf of
Mexico and the Brazilian offshore [...] 15 years ago, all this was
simply unthinkable." If the oil sands are allowed to grow
naturally, then extraction technology will continue to advance,
ultimately reducing the carbon-intensive nature of the industry.

The
truth about Alberta

While
popular media typically prefers to avoid reporting on international
success stories, it becomes especially important to note that in
2007, Alberta became the first place in North America to legislate
mandatory greenhouse gas reductions for large industrial facilities.
Alberta's carbon capture and storage program hopes to reduce
greenhouse gas emissions by 50 percent from expected 2050 levels, and
will lower emissions to an equivalent of 14 percent below 2005
levels. Carbon capture and storage is an initiative supported by the
United Nations Intergovernmental Panel on Climate Change, the
International Energy Agency, and has even been endorsed by Nobel
Peace Prize Winner, Al Gore. In July of 2008, the Alberta government
committed CND $2 billion (USD $1.9 billion) to kick-start its carbon
capture and storage projects, and by 2015 it is expected that the
initiative will store up to 5 million tons of carbon dioxide
emissions per year. What Alberta has done on its own to reduce carbon
emissions in its oil and gas sector is unprecedented in North
America, and one could even say the Western hemisphere.

Because
the extraction of bitumen from the oil sands does involve processes
which are technology, water, and carbon intensive, Alberta has chosen
to develop strong legislation to protect water supply and air
quality. As a matter of fact, in comparison to other provinces,
Alberta has some of the highest environmental standards in Canada.
Currently, in the oil sands region of Alberta, there are over 100
water quality stations in place, and the Alberta government works in
partnership with industry, First Nations (Native Americans), and
community members to monitor local air quality. Furthermore, it has
enforced provincial legislation aggressively in order to mitigate the
industry's environmental damage. Fines and environmental protection
orders are routinely given by regulators if oil sands sites are not
meeting standards, and funds are then reallocated to environmental
reclamation projects. Before any pundit chooses to judge Alberta's
management of the oil sands over critically, it is necessary to put
Alberta in the context of other oil producers. While it is obvious
that Alberta must continue to strengthen its legislation,
comparatively speaking, it has done a better job at enacting and
enforcing environmental protection than other countries boasting
comparable oil sands reserves. Countries like Venezuela and Saudi
Arabia have far less accountable legislative and judicial branches of
government, and thus do not hold their oil sands industries nearly as
culpable for environmental degradation.

Because
the province of Alberta has shown that it is willing to develop the
oil sands in a responsible way, its opinion and input should be
welcomed as part of the dialogue being pursued in the United States
to cut carbon emissions. As a major consumer of Alberta's oil sands,
the United States must respect Canada's needs when considering its
environmental legislation. Alberta's government has consistently
voiced that it will gladly continue reducing its own carbon
footprint, but insists that a US framework affecting its oil sands
must be framed by the North American Free Trade Agreement (NAFTA.)
Given that many lobbyists on Capitol Hill have demanded an
unconditional "halt to oil sands development," it would be
a welcome gesture if US public figures emphasized that responsible
growth of Canada's oil sands is both valuable and acceptable to the
United States.

What's
happening in the US House of Representatives?

Despite
the many benefits derived from Canada/US oil trade, Washington has
chosen not to highlight the importance of its historically unique
relationship with Ottawa. Instead of working closely with its
neighbor, key US legislators have framed the energy discussion in
unfriendly terms that hint at reducing US emissions at Canada's
expense. Since the emergence of the American Clean Energy and
Security Act, otherwise known as the Waxman-Markey bill, the wheels
have been set in motion for mandatory green house gas (GHG) controls.
Fathered by both the Chairman of the House Committee on Energy and
Commerce, and the Chairman of the Subcommittee on Energy and
Environment, the bill seeks to reduce US emissions by 17 percent
below 2005 levels, by the year 2020. According to The Economist
magazine, the bill's reduction targets are low compared to those of
other rich countries; however, they mark a sharp departure from the
status quo in the United States.

What's
happening in the US Senate?

Meanwhile
in the US Senate, a similar bill has emerged. The Kerry-Boxer bill
promises to put the United States "back in control of [its]
energy future." Titled the Clean Energy Jobs and American Power
Act, the title alone foreshadows sizable increases in US
governmental control over the energy industry, which would obviously
carry international implications for oil trade, especially for
Canada. In many ways, the wording of both bills seeks to breeze over
their potential to violate international free-trade agreements,
including NAFTA and World Trade Organization (WTO) provisions.

Introducing
a national "low-carbon fuel standard"

Most
agree that a final climate bill would likely employ a national
low-carbon fuel standard (LCFS). So far, California and eleven
Northeastern states have already signed agreements to implement LCFS,
and many more are considering it. In sum, a LCFS aims to reduce
emissions by requiring that transportation fuels sold to cars or
trucks be composed of only a limited amount of carbon-intensive
fuels. Basically, a LCFS seeks to reduce gasoline usage in favor of
bio-fuel usage. Bio-fuels are considered "non-carbon intensive,"
and include a range of fuels from vegetable oil to ethanol. Currently
the production of bio-fuel in the United States is mainly made up of
maize (corn) production, and has lately come under severe scrutiny by
economists and policymakers alike. Even though the industry has
absorbed millions in US government subsidies, the production of
bio-fuels in the United States has been far less
efficient
than in other countries like Brazil, which uses sugarcane to make its
unique brand of bio-fuel.

According
to some analyses, oil derived from the oil sands would need to be
blended with low-carbon bio-fuel on a one-to-one ratio, in order to
attain a life-cycle carbon count acceptable under LCFS rules. If this
analysis is accurate, it would theoretically cut demand for the oil
sands in half. Basically, a life-cycle carbon count measures the
amount of energy needed to extract one unit of output. For instance,
extracting one unit of output from the oil sands requires several
more units of natural gas than are needed to extract oil from
conventional reserves, thus contributing to the oil sands having a
higher carbon life-cycle. If enacted, a national LCFS would
disproportionately target Canada's oil sands sector.

While
at first glance it may seem like a good idea to enact legislation
incentivizing the consumption of low life-cycle carbon fuels, these
policies carry with them negative consequences for US energy
security. Under a national LCFS program, all vehicles would be
required to fill-up with a blended fuel. As the production of
bio-fuel in the United States is not currently enough to
satisfy a one-to-one ratio blend with gas coming from the oil sands,
in the short-term the blend will likely favor conventionally
extracted oil, at Canada's expense. Due to Canada having less
conventional oil reserves than oil sands reserves, a shift in US
demand toward conventional oil would redirect trade away from Canada.
If the United States comes
to depend less on Canada's oil sands, it will surely come to depend
more on conventional oil reserves from less dependable countries
overseas.

Kerry,
Boxer, Waxman & Markey: the new bullies on the block?

Ottawa
has apprehensively watched over US environmental legislation, holding
its breath in the hopes that Congress might spare its oil sands
industry. According to the Premier of Alberta, Ed Stelmach, "Canada
depends on Alberta's oil-rich economy to fuel prosperity,"
while, "any shut down in the province's oil industry would be
felt across the country." His comments have been consistently
reinforced by Prime Minister Harper, and Canada's Federal Minister of
the Environment, Jim Prentice, who both emphasize the importance of
Alberta's oil sands to the country's overall economic well-being.

If
upon its ratification, US environmental legislation is not flexible
enough to allow for Canada's oil sands industry to stay afloat, the
effect on the Canadian economy overall will be devastating. Any US
legislation that either directly or indirectly restricts the free
trade of Canadian oil would be a low blow, and should be swapped in
favor of bilateral agreements, negotiated with an equal investiture
of oversight by both parties. So far, the Canadian government has
remained amenable to enacting a framework of carbon cuts in
conjunction with the United States, but only at a reasonable cost to
their industry. Minister of the Environment Jim Prentice recently
stated that, "ultimately, the only effective environmental
policy is one that takes into account the competitiveness of the
Canadian economy --- and the preservation of Canadian jobs --- now
and in the future."

Relying
on Canada's oil, not bad given the alternatives

By
now, it should be clear that it is in the best interests of the
United States to work very closely with Canada in developing a North
American energy strategy that gracefully balances the need to
continue developing the oil sands with the need for comprehensive
carbon cuts. Given its profound socioeconomic stability and thriving
liberal democracy, Canada remains the perfect trading partner for the
United States. It plays by the rules, and its only request is that its partners
do the same. Canada is, as Stephen Harper reminds us, a "stable,
reliable producer in a volatile, unpredictable world."
Furthermore, Canada's oil is cheap, and requires the least amount of
political capital and international maneuvering to secure. As aptly
put by Alberta's Envoy to Washington Gary Mar in an exclusive
interview with the Council on Hemispheric Affairs, "Oil from
Alberta flows into the United States through a secure pipeline, and
there is no need for American soldiers to be put in harm's way
protecting it."

Canada
has options

Because
of the long-lasting friendship it has developed with its easygoing
Northern neighbor, the United States will likely expect Canada to
continue quenching its perpetual thirst for oil, without taking into
account the harm their legislation could do to overall relations with
the country. It remains to be seen if Canada will be willing to
swallow the bitter cost of heavy US regulations which
disproportionately harm the oil sands. Historically, it has been both
easy and reasonable for Canada to do business with the United States;
however, who is to say that under less amenable terms of trade,
Canada won't turn to someplace else? Given that in today's world
"black gold" holds its value better than most currencies,
it would be foolish to forget that Canada has options in choosing its
trading partners. This month, Stephen Harper embarked on a landmark
trip to China (the first in years), and his message could not have
been clearer. Advertising Canada as one of the most "welcoming
environments for foreign investment in the world," Harper
emphatically insisted that his country boasts "the resources to
meet China's ever-growing needs." Harper's underlying sentiment
has been echoed by Alberta's Gary Mar, who warns that "in the
event that America is not interested in Alberta's energy supplies,
then we will work on markets elsewhere in the world."

There's
more yen to come

Quickly
and aggressively, Chinese sovereign wealth funds and state-run
companies are becoming large-scale investors in Canada's natural
resources. In 2005, long before Harper's visit to Beijing, China's
Sinopec purchased a 40 percent stake in the Northern Lights Oil Sands
Project through its Canadian subsidiary. Earlier this year, it
purchased an additional 10 percent share, upping its ownership to 50
percent. The project is located northeast of Fort McMurray, Alberta,
and has a production capacity of 5 million tons of synthetic crude
oil annually. In August of this year, state-owned Petro-China claimed
an even larger stake in Alberta's oil sands, purchasing a 60 percent
share of the Athabasca Oil Sands Corporation's Mackay and Dover
projects, for a staggering CND $1.9 billion (approx USD $1.8
billion). The land covered under the Mackay and Dover projects alone
has been independently assessed to contain approximately five billion
barrels of oil, which is considerable taking into account other
reserves in the area. Looking beyond the billions of barrels known to
constitute the deposit, the most meaningful part of the Petro-China
purchase is that it signaled China's largest ever stake in Canadian
oil. Given that the US has enjoyed virtually unchallenged trade
hegemony with Canada up until this point, large Chinese investments
mark a sharp departure from business as usual.

A
new pipeline in the works

In
addition to these investments, plans are currently underway to
construct a pipeline that would ship oil from Alberta (a land-locked
province) to the Pacific Coast. Presently the only existing pipeline
infrastructure goes North-South, and if the new pipeline moves ahead,
it will eliminate the monopoly the United States has on
access
to Canadian oil. Not only will the pipeline ease Chinese access to
the Canadian oil market, but would also open up Canada's energy
sector to a variety of other Asian markets, most of which are
desperately seeking oil of any kind to meet their expanding
population's thirst for energy. According to Gary Mar, the new
pipeline would allow oil to be exported "to India, China, or
even Japan."

Looking
ahead

All
things considered, it is clearly in Washington's best interests to
carefully reconsider any environmental legislation that targets
Canada's oil sands. Due to the profitability of the oil sands and
their contribution to the overall strength of Canada's economy, it
would be foolish to underestimate the lengths that Canada will go to
in defense of their industry. While currently the United States
enjoys unchallenged and unrestricted access to Canada's oil, this
might not be the case in the future. With China knocking at Ottawa's
door, Prime Minister Harper need only open it a crack before floods
of yen replace lost US dollars. If Obama's environmental legislation
goes too far, Canada will be forced to develop the western-bound
pipeline, and by then it will be too late for the United States to
regain its lost energy security. Fortunately, there is still time for
the United States to once again demonstrate its respect
for
Canada by reforming legislation to accommodate the modest desire to
keep the oil sands alive.